'Economy faces risk of overheating'

The International Monetary Fund (IMF) has cautioned that the Indian economy faces the risk of overheating in the short-run. It has identified price management and financial stability as the major challenges confronting Indian policy makers.

"With GDP continuing to grow above trend, increases in international oil prices not yet fully passed through, credit and asset prices buoyant, and monetary conditions accommodative, the risk of overheating cannot be ruled out. On the international front, a sharper United States slowdown with potential spillovers to world growth could erode confidence in international financial markets, triggering capital outflows and volatility in emerging markets”, the IMF has said in its latest report on India.

Achieving financial sustainability while continuing to fund the development related sectors was another challenge, it said. This could only be done by reducing high debt and creating fiscal room to fund priority needs.

It stressed the need to promote more "job-intensive, inclusive growth, through further structural reforms, to create an environment in which growth more fully benefits the least advantaged."

The IMF also said that the challenge of fostering a broader and deeper financial sector to expand the channels of saving, investment and risk management needed to be addressed by the policy makers. It maintained however that the near term macroeconomic outlook was "bright" with real GDP growth expected to be around 8.2 per cent in 2006-07.

The wholesale price index (WPI) based inflation, it said, would remain in the 5–5.5 per cent range.

“Robust domestic demand is expected to contribute to a slight widening in the current account deficit (notwithstanding strong exports and services), readily financed by capital inflows," the IMF added.

On the external side, the IMF said that India's foreign exchange reserves were equivalent to over seven months of imports, while short-term external debt amounted to only 12 per cent of reserves and the overall external debt was 70 per cent of exports.

It noted that the current account deficit, at 1.5 per cent of GDP, was "manageable".

On the domestic side, it found financial soundness indicators favorable, and with asset holdings still modest, wealth effects from asset-price fluctuations, small. "The fiscal debt and deficit are on a downward trajectory helped by a favourable interest-growth differential", it said.